Luotea Oyj (LUOTEA) Earnings Call Transcript

Welcome to Lassila & Tikanoja's First Quarter Results Webcast. Today's broadcast is hosted by Lassila & Tikanoja's CEO, Eero Hautaniemi; and CFO, Valtteri Palin. There's an opportunity to ask questions at the end of the broadcast. Eero, go ahead.

Thank you, [ Inka, ] and welcome also on my behalf to this first quarter earnings release. First, a few highlights. Our strategy implementation is well on track. The first quarter conditions were challenging. Despite the challenging conditions, we had excellent sales growth actually across the businesses with the exception of Sweden. At the same time, the higher fuel prices and especially COVID-19 affected negatively to all of our business lines. We have implemented extensive price increases and other measures that will compensate this effect on the coming quarters. Also, according to our strategy, the Industrial Services entered to Swedish market with the acquisition of SVB. Let's take a closer look at the net sales development. And as I said, all of the businesses, except Sweden, grew very nicely. In Environmental Services almost 15%; Industrial Services 17.5%, but part of this was due to the acquisition -- the SVB acquisition but also the acquisition of small customer segment from Fortum earlier this year. In Sweden, we had in the comparison period, a lot of snow work that increased the sales in first quarter 2021. And that we didn't have this year to the same extent, and therefore, the sales declined, so that the underlying basic business was developing quite nicely still in Sweden, too. Adjusted operating profit declined, and it declined in all of the businesses. And the main reasons, as I said, were the COVID pandemic and also the increased fuel prices. We have calculated that combined, the impact was EUR 5.2 million, which is pretty significant. Most of that was -- came from COVID effect because we had to have a lot of extra work. We had to have a rented workforce. We needed to do much more outsourcing, et cetera, to compensate the fact that our sick leaves were significantly higher than in the comparison period, but also significantly higher than they have normally been. We have pretty strong seasonality in our business, which is visible on this slide. And obviously, that was, in a way, made even stronger by these conditions that I mentioned. But if we then move to the business area by business area review and first, Environmental Services. As I said, overall, the performance behind the COVID and fuel prices was very strong. And I'm really happy how we have managed to increase our market share. We have done an organizational change. We have strengthened our large customer sales, but also, we have put much more focused on regional sales, especially targeting for small and midsize customers. And all of that work is visible in the growth of net sales. The winter conditions combined with COVID had a big impact to our Environmental Services in the first quarter of this year. Because there was a lot of snow in big cities in Southern Finland, our ability to go through our routes was much weaker than normally, and we were a lot behind. And this caused a lot of overtime and a lot of delays, plus we didn't get certain bonuses that we normally get in normal conditions, and that also burdened our profitability in the first quarter. Our sick leaves in Environmental Services were as high as 8% in the first quarter, which we have not seen previously. Luckily, we can see now that this wave of COVID is behind us and sick leaves have returned to more normal levels. But overall, I would say the position for Environmental Services in Finland is strong, and I'm looking optimistically to the rest of the year. Then Industrial Services. Also here, from customer side, we did see a lot of fluctuation in the demand. And when we combine that with the high sick leave rates that we saw amongst our personnel, it was very challenging to plan the right amount of workforce for the first quarter. Even though the conditions were challenging, we managed to get pretty much the same level of profitability as a year before. Partially, this was helped by the 2 acquisitions that we made to the Industrial Services according to our strategy. Perhaps the more significant one is the acquisition of SVB in Southern Sweden. This is a very -- or the company has very good fit culturally to our Industrial Services. We surveyed quite a long time potential acquisition candidates from Sweden, and I'm really pleased that we managed to close the acquisition of SVB. And the first month of operation in L&T look very promising. We can see that there are opportunities for us to import our expertise from Finland to Sweden, and we can see that there are certain methods in Sweden that we can also benefit from here in Finland. The other acquisition that we made for Industrial Services was the small- and medium-size customer base from Fortum, about 2,000 to 3,000 customers that we acquired, and the estimated annual sales is about EUR 5 million to EUR 6 million. This is the business that we acquired, so we did not acquire any handling facilities or such. So it is only the business. The reason why we acquired this business is that we have very good coverage all over Finland, and this business very nicely complements to what we have already in the hazardous waste business in Finland. Also, this business looks promising, and I'm expecting a good development from our hazardous waste business in the future. Then moving on to Facility Services Finland. This year, I'm happy to say we managed the winter conditions well, and they did not burden in the same way our first quarter profitability as they have done previously. So we have learned from past and our subcontracting was done in a much better way. And we also managed to sell additional services better than we have done previously. So in general, I would say our property maintenance has clearly improved its performance and the cost savings measures that we did at the end of last year are clearly visible in our first quarter results. Nevertheless, as this business is very labor intensive, the COVID had a big impact to especially cleaning business but also to the other business lines. We had to do a lot of overtime and subcontracting, and we needed to bring a lot of rented workforce to cover up for the very high sick leaves that we experienced in the first quarter. But the improvement measures that we have done, they are working. And right now, it looks promising for the Facility Services in Finland as well. Then in Sweden, the curve of COVID sick leaves was different in Sweden. We had a very high peak in January and early February. And then in March, we basically saw no effect at all for the COVID. So there, the peak was high, but it was much shorter. And perhaps because of the different strategies that the countries have had against the COVID, the peak was behind us much faster in Sweden. It did affect, however, to the additional sales. And therefore, our January and February performance were behind the targets and behind the previous year. But from March onwards, we expect normal performance for Facility Services Sweden. Then some sustainability highlights. As you know, sustainability is very much in the center of our strategy, and we have made very good progress in sustainability as well. We have developed new services for our customers, and we can see, based on the meetings that we have had several [ this spring ] that there is a very high demand for sustainability solutions. One example is a work that we have done together with Kesko and Bewi where we're piloting recycling of Styrofoam, which is a very challenging material, and we are finding a good way to recycle this challenging material. From a personnel perspective, a couple of highlights. First one is that we are part of this StaffPoint and EK, which is the Confederation of Finnish Industry initiative where we provide jobs for refugees from Ukraine. Finnish bureaucracy has been heavy, but we have gotten through that. And I'm happy to say that we are employing the first people now as we speak. And hopefully, we will be able to offer much more jobs for refugees from Ukraine these coming months. Also, we have a lot of jobs for youngsters. We offer some 950 summer jobs during the coming summer. And hopefully, we can offer an excellent experience for the -- our sort of future generation when they get their first experience of work life. We have also -- we participate also in a pilot program where we test science-based target setting for biodiversity. This initiative is led by FIBS, and there are 10 leading Finnish companies in this initiative, and I'm very happy and proud to say that we are one of those companies. And I'm sure that we will learn a lot, but we can also contribute a lot to this initiative. Then our sustainability scorecard for the first quarter, I would like to take 2 highlights from this one. First one is our carbon footprint and especially our emission intensity, which has developed very nicely. It has come down to 710. And we are well on track achieving our target, which is to halve our CO2 emissions from 2018 levels to 2030. Really nice development. And this development is obviously a result of systematic work that we have done now for a couple of years to get our own emissions down. The other highlight, well, I'm not certain if it is a highlight, but certainly something to note is the fact that our sick leave rate was 6.5% in the first quarter, which is more than 1 percentage point higher than what it was a year earlier. And this is a big increase if you think that we have 8,500 employees. And it certainly was a challenging quarter to manage through, but we did that, and we were able to maintain our service level to our customers, which is very important to us and obviously to our customers as well. Now things look much better in relation to COVID, and we are gradually getting back to normal. And as I said, also the measures that we have done to offset the very rapid increase of diesel prices are affecting, and we expect to have a significantly better coming quarters for 2022. Right, then I give the floor to Valtteri.

Okay. Thank you, Eero, and good morning. Let's look at the financials of first quarter, and let's start with the adjusted operating profit. As you can see from the table, we have this certain seasonality in EBIT. It looks like we have copy-tasted the figures, but we haven't. So all the time, the first quarter is the lowest. And as Eero mentioned, the effect of COVID-19, we are very labor-intensive business, and expensive diesel price affected to our result EUR 5.2 million negatively. So actually, the operational development was quite good behind the figures. Then key figures, our gross capital expenditure were EUR 28.5 million compared to EUR 9.4 million. But this EUR 28 million consists EUR 21 million of acquisitions we made in the first quarter. So actually, the investments to our current operations in the first quarter was EUR 7 million. And our depreciation is EU R40 million. So this explains the good cash flow we had despite of the low result. Then return on equity and return on investment, they were negative due to the low result. And then balance sheet KPIs, equity ratio and gearing, they are on a lower level than a year ago. We acquired these 2 companies in the first quarter and also we paid our dividend at the end of March, EUR 17.5 million. The number of employees increased by more than 300 employees. Then net working capital, it was minus EUR 47 million. So it means that it finances our operations. It improved by EUR 10 million from comparison period. And the one reason is, of course, is that renewable energy sources is not included in the figures anymore. We are starting joint venture with Neova's [ similar ] business, and we are waiting for the competition authorities approval during the summer or maybe earlier. When the Ukrainian crisis started, we checked our customer base, and we basically don't have any Russian-owned companies as a customer. So there are no significant credit risk in our trade receivables. Net cash flow and net investments. Net cash flow after investments were minus EUR 6 million, but the part of acquisitions was EUR 13.3 million. So our normal cash flow was EUR 7 million positive despite of the low result. And same goes with the net cash used in investment activities. So they were roughly EUR 7 million. Interest-bearing and liquidity. Our liquidity position is strong. The net interest-bearing debt increased to EUR 148 million due to these acquisitions we made from comparison period. We have acquired 5 companies during the last 12 months, the Sihvari, Spectra, Serveco, and now this year these 2 companies which Eero mentioned. This IFRS 16 consolidated leasing liabilities have been between EUR 70 million to EUR 75 million, and cash in hand was EUR 22 million. We decided a few years ago that we will lower our cash balance, and we can operate with a lower amount of cash. So we will lower our interest cost and also our capital employed. Our revolving credit facility of EUR 40 million was unutilized at the end of the quarter and also our overdraft bank limit EUR 10 million was also not in use. And in the first quarter, we signed this revolving credit facility of EUR 40 million. We increased the amount by EUR 10 million due to the higher net sales and bigger balance sheet. For the first time, our financing was sustainability linked. It's linked to 3 KPIs: carbon footprint, carbon handprint, and also work safety. So our liquidity position is really good. Maturity structure of the loans. As you can see from the table, this EUR 50 million bond will mature next year in September. So we will probably do refinancing before that. And also, this EUR 25 million bank loan will mature also next year, but we have one option here for that that we can use if needed. Then EUR 50 million bank loan will mature in 2024. It has a EUR 30 million interest rate swap. So most of it is in fixed interest rate. And at the moment, 64% of our interests have fixed interest rates, which is good due to the increasing interest. And also, our effective interest rate was 1.1%. Good. And now I give back to Eero.

Thank you, Valtteri. As we said when we gave the outlook for the year 2022, already then we expected that the first quarter will be challenging because of the COVID. It was visible already at the time when we released our earnings for 2021. And indeed, it was challenging because of COVID. On top of that, obviously, the diesel prices have increased significantly since we gave our outlook for the year. But as I said, we have implemented extensive measures to offset this high increase in the diesel price and those measures have been successful, and we have gotten through at very good rate the price increases. And therefore, we repeat our outlook where we say that the net sales and adjusted operating profit are estimated to be at the same level as the previous year. Good. Thank you. And I guess, we are ready for questions, [ Inka. ]

Operator, we are now ready for questions.

[Operator Instructions] We will now take the first question from Jaakko Tyrvainen.

It's Jaakko Tyrvainen from SEB. A couple of questions from my side, please. Regarding the recycled raw material prices, how have those developed since the escalation of the Ukraine situation? And did you see any impact of the changes of those prices in Q1? And how should we expect the possible price moves to impact your earnings going forward?

Yes. Excellent question. And actually, I forgot to go through that in the presentation. The secondary raw material or recycled raw material prices are at good level, and they got to back to normal levels towards the end of last year, and especially for some fractions, they are even higher right now. So the price level is good and that certainly helped us a little bit in the first quarter, but we expect a bigger support for our earnings in the coming quarters. And right now, the market looks pretty good when it comes to the secondary raw material prices.